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Briefing highlights

  • OPEC deal juices Canadian dollar, stocks
  • What does the agreement really mean?
  • What the analysts say
  • SNC-Lavalin cuts 2016 outlook
  • Commerzbank cuts deep

OPEC deal juices loonie, stocks

OPEC’s production deal may have juiced stocks and oil-sensitive currencies like the Canadian dollar, but analysts are wary.

The Organization of the Petroleum Exporting Countries, which amid the collapse in oil prices had failed to come together to support crude, finally struck an agreement Wednesday that calls for a collective production target of between 32.5 million and 33 million barrels a day.

The details – specifically the individual targets of the 14 member nations – haven’t been worked out. That’s all supposed to happen at a Nov. 30 meeting.

The OPEC announcement drove up oil prices, along with currencies and stocks.

The dollar, which was sitting at about 75.6 cents U.S. before the deal, shot up by a penny, and was sitting at about 76.4 cents by midday.

“OPEC’s commitment to cut output by between one-half and three-quarters of a million barrels a day has done more for oil-sensitive stocks and currencies, as well as overnight risk sentiment, than for oil prices themselves,” said Kit Juckes, chief of foreign exchange at Société Générale.

Observers believe the oil price rise will hold, though likely won’t go much further until the Nov 30 meeting.

“The reasons that brought Saudi to take a step back and to co-operate with other producers suggest that the price of a barrel should sustainably recover,” said London Capital Group senior market analyst Ipek Ozkardeskaya.

“We expect the price of a barrel to recover by $5 to $10 by the end of the year, and project the price of a barrel of [West Texas intermediate] at $55/$58 by the end of 2016.”

That recovery, Ms. Ozkardeskaya said, should mean a “solid basis” for a further rise in the loonie. So much so that she now sees the Canadian currency at between 80 cents and 82 cents by the end of the year, compared with an earlier forecast of 78 cents.

Adam Cole, a Royal Bank of Canada currency strategist in London, agreed the oil gains should hold, but not necessarily gain that much more, given the questions that won’t be answered until late November.

What does it really mean?

Market analysts say there are many questions still to answer, but the agreement is significant.

There are those, though, who question the impact.

On the “significant” side is Société Générale’s Michael Wittner, who says that it’s not the size of the cut that matters, but rather that Saudi Arabia, which had held out against supporting prices, and OPEC are actually doing something.

“The significance of the production cut that was agreed [Wednesday] is not the implied cut or the actual cut, but the fact that Saudi Arabia and OPEC have returned to active market management after an intentionally passive period of almost two years, when they let the market itself – prices, in other words – do the job of managing supply for them,” Mr. Wittner said.

“Saudi Arabia and Iran and other countries sat down at the table, discussed their differences, compromised, and successfully negotiated an agreement,” he added in a report.

“In our view, this far outweighs the production volumes that may or may not be removed from the market. If Saudi Arabia and OPEC have returned to a more active role, this means that further adjustments can and will be made going forward; it also means that the uncertainty created by countries such as Iran, Nigeria and Libya can be dealt with.”

CMC Markets chief analyst Michael Hewson, noting the final details still to come, isn’t quite so positive.

“A committee has been set up to deal with that, and it is likely to be a tall order if history is any guide,” Mr. Hewson said.

“Ultimately the proof of the pudding will be in the eating, and if history is any judge, the detail will fall short. If anything, this looks like another attempt to keep a floor under prices without actually having to do anything. For now it seems to be working, the ultimate in jaw-jaw.”

What the analysts say

“It has been agreed that production will fall into a range between 32.5 million and 33 million barrels a day, however given that production in August was 33.3 million barrels, the cut doesn’t equate to a significant reduction, at a time when the market is already oversupplied.” CMC’s Mr. Hewson

“In the constantly changing mix of bullish and bearish factors for the oil markets,[Wednesday’s] agreement will be added to the bullish side of the ledger. This also assumes that OPEC does, in fact, successfully follow through at the end of November and adopt and implement the deal with the appropriate level of detail. Ongoing uncertainty about the deal, and associated developments and news flow, will contribute to continued high volatility in the next two months.” Société Générale’s Mr. Wittner

“The outpourings of glee from the oil industry tell me pretty clearly that as prices rise, non-OPEC supply will start to react.” Société Générale’s Mr. Juckes

“[Yesterday’s] news should accelerate the draw-down in commercial inventories, which are elevated by historical standards. It will also likely mean that shale producers in the U.S. will be called upon to meet demand growth, which is slated to register around 1.2 million barrels a day over the next year – something we have already started seeing budding signs of with the slight upturn in U.S. rig counts.” Nick Exarhos, CIBC World Markets

“It was time for Saudi Arabia to temper its appetite for a larger market share, given that its own finances started to feel the pinch due to very low oil prices for a longer-than-expected period of time. The country needs to increase its income, and, apparently, increasing the market share alone would not be sufficient to fill in the widening gap in the budget.” London Capital Group’s Ms. Ozkardeskaya

“Expectations of a bigger cut to output later on in the year, ideally with Saudi Arabia and Russia, the two biggest players, doing their bit, could see oil reverse its traditionally weak performance in the fourth quarter and push higher. It turns out that OPEC members can agree, and no doubt oil companies and their investors will be hoping that this outbreak of amity continues into the end of 2016.” IG’s Chris Beauchamp

SNC-Lavalin cuts outlook

SNC-Lavalin Group Inc. is cutting its annual forecast because of projected results from two Middle East oil and gas projects.

The Canadian engineering company said it now expects earnings per share of between $1.30 and $1.60, down from an earlier projection of $1.50 to $1.70.

“Following its most recent evaluation and analysis of its projects portfolio, the company had just established, and expects to be recording in the third quarter, unfavourable cost and revenue reforecasts on two oil and gas projects in the Middle East,” it said in a statement.

“The fourth quarter is expected to return to a more normal run rate, and discussions are ongoing to attempt to resolve the commercial issues in these contracts.”

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